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J.C. Penney could learn from Circuit City

I have been watching with interest J.C. Penney’s attempts to reinvent itself. It’s an amazing gamble, a vision that, if works, could bring some much-needed change to retail at a time where the Internet is continuing to drive business growth (such as a $1 billion Black Friday performance by e-tailers).

But J.C. Penney has been in the short term laying off tons of people as it begins its transformation. Knowing people who work there, I am starting to wonder if the cuts were too deep. Based on a new filing, J.C. Penney now believes it’s a risk as well.J.C. Penney management would benefit from taking a look at some of the mistakes of former retailer Circuit City, a place I miss dearly, not the least of which because it was my first job, but because I routinely got a better deal on items there than I did other stores. The lessons learned from their mistakes could come in handy for J.C. Penney right about now.

While I was still an employee, they got rid of appliances, ceding that ground to Best Buy and others. Around that time, chains like Lechmere and Montgomery Ward were going under. While not a sexy business, they could’ve picked up market share from these companies.

Circuit was a commission-based retailer, but began to move away from it. In 2003, a year after I left, they abandoned commission in favor of hourly associates, a move that mimiced Best Buy and was designed to reduce costs. At the time they did it, they also eliminated their most paid employees. Given they were commissioned associates, they effectively eliminated their top sellers, which generally were their most knowledgeable. For some reason, they did this at least one other time to cut costs, eliminating most of those that had stayed on after the change to hourly, and replacing them with cheap labor.

J.C. Penney has been doing the same, eliminating higher-paid management layers and changing the management style. It’s a huge gamble to risk long-term benefits of having seasoned people by saving the salaries in the short term. After each round of layoffs, Circuit’s sales fell more than expected – the committed employees that pushed a lot of the sales forward had been let go.

The company says that morale and efficiency could be affected by the loss of those employees. If you see higher paid people being replaced by lower-paid people, and you are now one of the higher paid people, you’d be down too. And slowly the knowledge is drained as people leave or get laid off. It doesn’t bode well given the stores are still too early in their conversions.

Increasingly it’s looking like J.C. Penney bit off too much, too quickly. They can turn it around, but they haven’t made it easy on themselves.